FX Update: Whiplash is not a sign of a healthy market
Summary: The sudden meltdown in risk sentiment yesterday, followed by an impressive reversal that wiped away much of the damage, is not a sign of a healthy market, at least tactically. Markets could remain a bit edgy after this episode and at least into early January, especially around the two run-off elections in the US state of Georgia that could yet grant more policymaking control to the incoming Biden administration.
Today’s FX Trading focus:
Yesterday’s episode underlines that the USD is the safest of safe havens.
Yesterday’s sudden meltdown in risk sentiment, apparently on the Covid-19 mutation news, saw a highly correlated move across asset classes, as poor liquidity saw the USD sharply higher, US treasuries likewise (prices up, yields down), equities down, etc., before everything reversed in unison and nearly managed to get back to where it came from. The comeback looks like a win for the optimists, but the whole episode suggests markets are rather frazzled and fragile here and could suffer further setbacks after revealing how easily significant air pockets in confidence can suddenly appear.
Two noteworthy developments were on display yesterday as volatility rocked exchange rates. The first of these was that the US dollar is clearly the top dog in FX-land when these moves unfold, as the JPY was only modestly resilient in the crosses while lower versus the US dollar. By the way – an interesting signal from new Japanese PM Suga, who appears to want to defend the 100 level in USDJPY at all costs. Likewise, CHF made now waves either and hasn’t really through all of the recent Brexit concerns, either. Second, CAD was very sensitive to the oil move lower, with the latter market showing some refreshing independence from jumpy contagion across asset markets.
Eventually, other exporting countries (Europe first, but others eventually too) will join Japan in the competitive devaluation game if the USD comes under further heavy pressure in 2021. So, barring extremely high inflationary pressures and/or galloping growth optimism, the path lower for the USD could prove rather fitful. Again, the key is whether everything is coming up roses post-Q1 on a successful and rapid vaccine roll-out (max USD pressure) or a less positive growth path and more caution.
And in the nearest term, we have the residual uncertainty on the US political situation through the January 5 Senate run-offs in Georgia, with polls very tight in these races. Remember that both would have to go to the Democrats to change the voting balance in the US Senate to a hair-fine 50-50 (with VP Harris then able to cast the deciding vote.)
Today will be the last update until next Monday. Have a wonderful holiday if you are taking one!
Chart: GBPUSD
Buffeted by USD strength yesterday and Brexit concerns rising and falling and rising again (today, the EU has rejected the latest UK concession on fisheries), GBPUSD has proven very volatile and will likely remain so until we finally know what shape the Brexit situation takes into year-end – if the fisheries issue is the last one standing, I have a hard time seeing both sides willing to go to the wall over that, but the only two things I have conviction on at the moment are 1) that trading spot is futile and traders should take a two-week or longer directional long option trade as the way to maintain a position in sterling, whether versus the USD or EUR, and 2) that the ceiling for sterling even in the best of scenarios could prove rather low, once a decent rally is in the rear-view mirror. Sterling is beset with the same structural issues as the US dollar (external deficit), with only its still somewhat cheap valuation working in its favour – a valuation that was even cheaper for a very long time but still didn’t provide much improvement in external imbalances. The 1.3500 level is the fulcrum here but we’re likely to be in a very different place in a month’s time, whether higher or lower.
John Hardy
Head of FX Strategy
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Today’s FX Trading focus:
Yesterday’s episode underlines that the USD is the safest of safe havens.
Yesterday’s sudden meltdown in risk sentiment, apparently on the Covid-19 mutation news, saw a highly correlated move across asset classes, as poor liquidity saw the USD sharply higher, US treasuries likewise (prices up, yields down), equities down, etc., before everything reversed in unison and nearly managed to get back to where it came from. The comeback looks like a win for the optimists, but the whole episode suggests markets are rather frazzled and fragile here and could suffer further setbacks after revealing how easily significant air pockets in confidence can suddenly appear.
Two noteworthy developments were on display yesterday as volatility rocked exchange rates. The first of these was that the US dollar is clearly the top dog in FX-land when these moves unfold, as the JPY was only modestly resilient in the crosses while lower versus the US dollar. By the way – an interesting signal from new Japanese PM Suga, who appears to want to defend the 100 level in USDJPY at all costs. Likewise, CHF made now waves either and hasn’t really through all of the recent Brexit concerns, either. Second, CAD was very sensitive to the oil move lower, with the latter market showing some refreshing independence from jumpy contagion across asset markets.
Eventually, other exporting countries (Europe first, but others eventually too) will join Japan in the competitive devaluation game if the USD comes under further heavy pressure in 2021. So, barring extremely high inflationary pressures and/or galloping growth optimism, the path lower for the USD could prove rather fitful. Again, the key is whether everything is coming up roses post-Q1 on a successful and rapid vaccine roll-out (max USD pressure) or a less positive growth path and more caution.
And in the nearest term, we have the residual uncertainty on the US political situation through the January 5 Senate run-offs in Georgia, with polls very tight in these races. Remember that both would have to go to the Democrats to change the voting balance in the US Senate to a hair-fine 50-50 (with VP Harris then able to cast the deciding vote.)
Today will be the last update until next Monday. Have a wonderful holiday if you are taking one!
Chart: GBPUSD
Buffeted by USD strength yesterday and Brexit concerns rising and falling and rising again (today, the EU has rejected the latest UK concession on fisheries), GBPUSD has proven very volatile and will likely remain so until we finally know what shape the Brexit situation takes into year-end – if the fisheries issue is the last one standing, I have a hard time seeing both sides willing to go to the wall over that, but the only two things I have conviction on at the moment are 1) that trading spot is futile and traders should take a two-week or longer directional long option trade as the way to maintain a position in sterling, whether versus the USD or EUR, and 2) that the ceiling for sterling even in the best of scenarios could prove rather low, once a decent rally is in the rear-view mirror. Sterling is beset with the same structural issues as the US dollar (external deficit), with only its still somewhat cheap valuation working in its favour – a valuation that was even cheaper for a very long time but still didn’t provide much improvement in external imbalances. The 1.3500 level is the fulcrum here but we’re likely to be in a very different place in a month’s time, whether higher or lower.
John Hardy
Head of FX Strategy
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
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